July update

Price manipulation part 2…

One of the more interesting aspects of the ongoing “scandal” around oil price manipulation was the sudden limelight afforded to the oil pricing agencies and in particular Platts (whose offices were “raided” alongside BP, Shell and Statoil). This is a company that few outside of the industry have ever heard of and for Joe Public, the idea that a pricing agency – who neither buys nor sells oil – “sets” prices on a daily basis will come as quite a shock.

There are three main oil pricing agencies, each with global operations; the largest is Platts, owned by the US publishing giant McGraw-Hill, the independently owned Argus is second in size and the third is the much smaller ICIS, with its focus mostly on the lower end of the “barrel” (ie, bitumen, base oils etc). The first misconception is that the pricing agencies “set the oil price”, which is probably the reason they are so unpopular with so many. But Platts, Argus and ICIS are simply journalists reporting on oil transactions in the same way that Reuters report on the news and Bloomberg report on financial markets. So when people refer to the “Platts Price”, what they really should be saying is “the oil price as reported by Platts”.

The scale of the pricing agencies’ activity is undoubtedly impressive, largely because there is no such thing as the one oil price. If only it were so simple! Instead, defined geographies are reported on (eg, Baltic, North-West Europe, Singapore, New York Harbour) and each geography has numerous fuel grades. For example in North-West Europe (sometimes called ARA = Amsterdam-Rotterdam-Antwerp), diesel sales are recorded for both 10 parts per million (10ppm) sulphur as well as 50ppm sulphur. There is also the Benelux quote, the NWE/French quote and the UK quote. Then we have barge sales for the inland European market or cargo sales for the export market. And finally the trade prices are either ex-jetty (FOB = Free on Board) or delivered (CIF = Carriage, Insurance and Freight). Start adding all the other grades of fuel to be priced (propane, butane, naptha, gasoline, jet fuel, gasoil, fuel oil, bitumen, base oil to name but a few) and you get an idea of how much information the pricing agencies are publishing on a daily basis. These guys are certainly busy, but so they should be, because it is their reported prices that are used by wholesalers, resellers and retailers around the world as the basis for fuel sales to the end-user. So whilst it may be wrong to say that Platts or Argus “set the prices”, it is certainly correct to say that (for example) the ARA prices on a Monday are the de-facto consumer price a couple of days later in the whole of Northern Europe (UK, Denmark, Belgium, Netherlands, Northern France and Germany) and the pricing agencies are responsible for publishing that price.

How is this data reported? Well it’s a great deal more scientific now that it was 20 years ago when traders – busy working their 2nd or 3rd pint after a long-hard morning – were rung by Platts to give their “assessment” of prices. Nowadays prices are posted on the pricing platforms, thus providing transparency and liquidity. Also gone are the days when Platts has to ask for price data, with traders as a matter of course submitting their trade prices as the day progresses. Each oil trade is made up of a bid (from a buyer) and an offer (from a seller) and at the end of the negotiation, there is a transaction – all of which are posted onto the pricing platform. Anonymous information is not permitted and any anomalous prices are also excluded.

But like any process, there are flaws. For example, when the transaction data is posted, how diligently do the pricing agencies check-up on the jetty loading registers and shipping reports to actually verify that the transaction really took place? Plus, it is not unheard of for pricing data to be based on bids and offers only, with no transactional information included. Surely a published price can’t really be considered the true price, if it is only based on an initial offer to buy and a corresponding counter-offer to sell? Most people would agree it can’t, but what can the pricing agencies do if the buyer and seller choose to make their transaction private & confidential? Surely this is the prerogative of any commercial business? Finally, there has always been much criticism of the Platts methodology of only reporting on prices at the end of the day (Market on Close). The argument goes that a 30 minute time window at the end of the day produces such frenzied activity that normal market prices are skewed (think of a real market trader selling tomatoes at the end the day and wanting to clear his stock – isn’t the price of tomatoes throughout the day a more accurate reflection of their value, than a set of intense transactions just before everyone goes home?) Not really says Platts, whose response to this criticism can be basically boiled down to the fact that most trading activity is done at the end of the day, so why bother reporting on earlier occurring, sporadic trades which run the risk of producing exceptional data?

These are going to be uncomfortable times for the oil pricing agencies, principally because so much rides on the data they produce. But the agencies can only ever report on the data that they receive from the oil companies and nor do they not profit in a direct way from movements in the oil price. So it seems likely that the role of the price agencies will be discreetly dropped from the scope of the investigation in due course – after all, the oil pricing agents are only conveying the “message” and it is always bad form to shoot the messenger…

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